November 18, 2020

A Quick Glance At Investing In Hazelnuts

by Sara Wensley

Director, Growth and Marketing

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A Quick Glance At Investing In Hazelnuts
FarmTogether Bespoke Hazelnut Orchard
Hazelnuts' accelerating popularity among farmers and consumers alike has made them emblematic of the innovation going on in modern American food and farming.

Though they are known mainly as the key ingredient in the ever-popular snack spread Nutella, hazelnuts have a long history of diverse uses in human food that continues to evolve to this day.

Originally native to eastern and southern Europe, hazelnut trees rapidly expanded northward and eastward after the end of the last ice age, and evidence of their importance to humans since then has been found across the globe. Remains of hazelnut shells have been found in archeological investigations of stone age sites in what is now the UK, Germany and Scandinavia, and mentions of hazelnuts have even been found in religious texts from ancient civilizations as far east as China.

Now, with advances in their breeding and the ongoing “snackification” of diets in the US and around the world, hazelnuts' accelerating popularity among farmers and consumers alike has made them emblematic of the innovation going on in modern American food and farming.

Turkey has dominated commercial production for decades, accounting for roughly 60-70% of global supply, followed by Italy at about 20%. Until recently, the US had never accounted for more than 4-5% of production, but this is changing rapidly: Thanks to Oregon’s Willamette Valley, where FarmTogether has already purchased several orchards, land planted in hazelnuts in the US had grown from 35,000 acres as of 2012 to over 85,000 in 2019, resulting in a record crop of over 60,000 tons in 2020. This growth is projected to continue over the next 5-10 years, especially as new research into hybrid varieties improves versatility and disease resistance in the crop, and potentially even opens up new commercial growing regions in the US.

Below, we’ll explore some key trends in hazelnuts’ production and marketing to showcase why land planted in hazelnut orchards represents such a compelling opportunity for US farmland investors.

Origins: From Ancient Trees to Hybrid Shrubs

What we refer to today as “hazelnuts” are the ripe seeds of tall woody shrubs bred from several main ancestors. The first of those ancestors is the European Hazelnut tree, Corylus avellana, which was first brought to the Pacific Northwest of the US in the mid-19th century by pioneering nurserymen who had imported the trees from central Europe.

C. avellana is still the most commercially important variety grown globally and dominates production in Turkey and the surrounding region. However, once early farmers attempted to grow it at larger scales in the US, they discovered that C. avellana struggled to achieve significant nut-set in colder climates and that it was particularly susceptible to a disease known as Eastern Filbert Blight. The word “Filbert”, meanwhile, actually refers to another important ancestor called Corylus maxima, a smaller shrub native to the same region of southeastern Europe that produces a very similar nut.

Both of these European ancestors have since been crossed with two cousins native to eastern and central North America, the American Hazelnut (Corylus Americana) and the Beaked Hazelnut (Corylus cornuta). While they have never attained the commercial importance of the European Hazelnut, these two varieties play an important role in modern breeding thanks to their inherent resistance to Eastern Filbert Blight and their tolerance of a much wider range of soil types and climatic conditions, all of which lead them to be hardier and higher-yielding.

Today, innovative breeding research programs at institutions like Oregon State University are taking advantage of all of this genetic diversity to create new varieties that preserve the flavor and nutritional properties of C. avellana, while also incorporating the hardiness of its North American relatives. These “Hybrid Hazels” are behind the recent eruption of new growth from the US Hazelnut industry in that they not only present more economically attractive production options for farmers in the Willamette Valley, but they also present huge potential for expansion throughout the rest of the US.

Oregon State’s breeding program has even partnered with private industry players like the Arbor Day Foundation and the Hazelnut Marketing Board to conduct research specifically geared toward opening up new opportunities for commercial hazelnut production around the rest of the country.

Simplifying the Maintenance and Harvesting of Hazelnut Orchards

Along with hardiness to extreme weather and diseases, innovations in hazelnut breeding and agronomy are also helping farmers in the US minimize the labor involved in production and harvesting, and optimize the productive lifespan of each hazelnut planting.

For several reasons, traditional hazelnut harvesting has mostly been done by hand, entailing a high requirement of manual labor. All hazelnut trees bear their nuts in “clusters”, but whereas C. avellana’s nuts will fall naturally from the tree when ripe, the nuts on some hybrid varieties, such as those being piloted for commercial production in the Upper Midwest of the US, stay fixed to their cluster on the bush. While this would normally mean that they need to be removed from the bush manually, growers and researchers in the upper mid-west are experimenting with using mechanical blueberry harvesters to shake the crop onto the ground, where it can then be collected by via the use of pneumatic harvesting machines. Research and development into hazelnut harvesting equipment in the US is a nascent field, but is gaining steam as hazelnuts grow in commercial importance.

In the Willamette Valley, most commercial hazelnut varieties do share the drop-at-ripening characteristic with C. avellana and can therefore be much more efficiently harvested. This is a major boon to farmers, as studies comparing mechanized and manual harvesting methods have shown that pickup of ripe hazelnuts by machine can yield 6-7 times more per hour than traditional hand-harvesting methods. These methods are in use in each of FarmTogether’s Hazelnut Orchard properties, including the currently-open Interstate Hazelnut Orchard.

Beyond mechanizing harvesting, good orchard management practices such as pruning and weed control are important for profitable operations as well. Much like many tree and shrub crops, hazelnuts will not begin to produce a harvest until at least 2-3 years after planting and usually won’t reach full production until the 5-year mark. But, once matured, a hazelnut tree can continue producing bountiful harvest over an incredibly long timespan – even beyond 50 years!

Throughout their lifespan, proper pruning and maintenance of mature trees can be hugely beneficial for maintaining yields. Pruning to thin out mature trees can allow more sunlight to penetrate all parts of the tree, resulting in a greater nut-set, and removing old or diseased growth can re-direct the plant’s energy to generating yield on younger and healthier branches. In extreme cases, farmers can even use a technique called “coppicing”, which amounts to pruning an entire tree that has shown diminished yields down to within a foot of the ground, from which it can re-generate new vegetative growth and be producing again within three years. Agronomists at Oregon State and elsewhere recommend managing these timelines cyclically, such that recovery or new plantings on some plots can be offset by yield from mature trees on others.

Development of the US Hazelnut Market

Demand among US consumers for hazelnuts and hazelnut products is accelerating, and there are a plethora of factors influencing its growth. For starters, as of 2015, only 20% of the hazelnuts consumed in the US were produced domestically, and both government, university extension, and farmer support programs have begun to elevate their focus on the crop to fill this gap. Oregon may be the biggest present hotspot, but the Upper Midwest isn’t far behind.

Alongside this growth in domestic production, the Hazelnut Marketing Board is going a great deal to raise awareness of this excellent ingredient among both consumers and restaurant and food service industries. Growth in the market could come from increases in existing uses as well as from the launches of new consumer products, and both could come from within the US as well as abroad. In fact, the Hazelnut Marketing Board believe that a great deal of demand for exported US hazelnuts could come from China, India, Japan and South Korea, where hazelnuts are already valued highly for snack foods and holiday treats.

Consumers’ interest in hazelnuts also seems to come as much from desserts and confectionery products as it does from looking at hazelnuts as a source of good nutritional benefits. Oregon Hazelnuts, an industry & growers’ association, has dedicated an entire page of their website to exploring these nuts’ myriad health benefits.

All of this energy behind the growth of the market has also encouraged a variety of different types of farmers to look to expand to hazelnuts as a means of diversification and to supplement farm income. This is true both in Oregon as well as in other parts of the country and will likely continue to look appealing the more that Oregon’s producers see sustained commercial success. Hazelnuts, given their fairly low maintenance requirement and the fact that they wind-pollinate and bloom in mid-winter months, can be an attractive supplemental income option that doesn’t interrupt existing production of other crops. Hazelnut trees can even be planted as windbreaks, living fences, or generally on other more marginal land on farms such as steep slopes, and harvested during other crops’ off-seasons.

Competitive Advantages for US Hazelnuts: Insights from a Case Study of The Ferrero Group

Between elevated interest from farmers, consumers, industry and research leaders, and the government, hazelnut farming in the US is already growing at a rapid rate, and will continue to do so as the market for hazelnuts materializes. But beyond these trends, a couple pieces of macro-level global insight from the last decade might highlight US hazelnuts’ potential even more brightly.

Firstly, The Ferrero Group, makers of Nutella and Ferrero Rochet chocolates, by themselves use about 25% of the global supply of hazelnuts every year. The 2010’s saw a couple of key events that encouraged them to begin looking outside their traditional supply chains in Turkey, and that illustrate the compelling role that a more developed US Hazelnut industry could play. The first of these was a historically severe frost in the spring of 2014 in Turkey, which decimated roughly a third of that country’s annual harvest. This caused a huge, immediate spike in Hazelnut prices, given the shortage in supply, at a time when Cocoa prices – the other main component of Ferrero’s flagship products – were also soaring. This put the world’s biggest hazelnut buyer under immense pressure to shift its supply chain to include a more geographically diverse base of production.

Within several years, in 2019, Ferrero was also forced to respond to various exposés of child labor in Turkish hazelnut production that ultimately went to be used in their products. With consumer packaged goods companies around the world coming under increasing pressure to source their ingredients responsibly, this provided yet another reality-check for the biggest player in the industry that alternative sources of supply – where child labor is not a risk – would be a smart investment.

Commercial production in the US looks very different than it does in Turkey: Whereas farms here are generally larger-scale, mechanically-harvested operations, much of Turkey’s hazelnut farms are tiny, manually maintained and harvested orchards whose operators sell their crop through intermediaries. Given that Ferrero buys about a third of the Turkish hazelnut crop every year, this gives them a dual headache – they can’t guarantee that their supply chains will be traceable to the producer level, and if they can’t do that, then it will be impossible to guarantee the avoidance of child labor while sticking to the same base of production.

Whether Ferrero ultimately does shift its sourcing to the US or not – it is by no means guaranteed – their case study still illustrates why US producers could enter a fragmented global marketplace at a competitive advantage, especially as the commercial uses of hazelnuts grow broader and interest in both hazelnuts and sustainable agriculture grows among consumers.

Outlook: A Historically Stable Investment with Strong, Diverse Upside

Growth in demand for hazelnuts in the US and abroad projects to remain strong, and the solidifying US hazelnut industry appears to be taking shape to match that growth. Combined with being an attractive option for farmers looking to shift to permanent crops, or simply to supplement farm income, we have a lot of confidence that hazelnuts can be a great place to start for new farmland investors.

FarmTogether’s mission is to support sustainable and profitable farming by leveraging technology, and removing the barriers to entry to farmland ownership, all the while providing individuals, our investors, with an opportunity to share in the rewards from farming well.

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Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.

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